Adjustable versus fixed rate loans
A fixed-rate loan features the same payment over the life of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments on a fixed-rate mortgage will be very stable.
At the beginning of a a fixed-rate mortgage loan, most of the payment is applied to interest. The amount paid toward your principal amount increases up gradually each month.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Reliance Mortgage Service, Inc at 562 320-0510 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are generally adjusted every six months, based on various indexes.
Most Adjustable Rate Mortgages are capped, so they can't increase above a certain amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that guarantees that your payment will not go above a fixed amount in a given year. The majority of ARMs also cap your rate over the life of the loan.
ARMs most often feature their lowest, most attractive rates at the start of the loan. They usually guarantee the lower rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. These loans are best for people who expect to move within three or five years. These types of adjustable rate loans are best for people who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan on remaining in the house longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 562 320-0510. It's our job to answer these questions and many others, so we're happy to help!